Some financial commentators have said that OPK's stock price dropped because the shares that they will be issuing to the BRLI stockholders will increase the number of shares of OPK so much that it will dilute the value of the stock, but none of the commentators reported the percentage of dilution.
Opko Health will issue 2.75 shares of OPK for each share of BRLI. BRLI has 27.85 million shares, so OPK will issue 76.6 million new shares. OPK has 458.4 million shares, which means that the share count will increase 16.7% to 535 million shares. So the dilution factor is 16.7%
Just before the announcement that OPK would be acquiring BRLI by issuing shares, OPK's stock price was $19.12 Using a dilution factor of 16.7% would mean that the stock should have dropped from $19.12 to $15.91, but it has dropped below that, and of course, it could drop further. However, prior to the BRLI acquisition announcement, OPK was in a strong uptrend. From mid 2013 until December 2014, a period of over a year, the stock stayed in the $8 range. Then in December it started climbing at a steep angle and reached and stabilized at $14 for three months. In May it shot up to $18, which it stayed at for two weeks, and then spiked to $19. And that was when OPK made the announcement about BRLI, and the stock took a nose dive.
But there were good reasons why we had been in a strong uptrend, and why we will resume it. Not too long ago commentators were saying that Opko Health was a dangerous stock to be in and rated it a sell, because it was burning cash faster than it was generating it. The number of short sellers was also increasing. OPK's revenues have been growing over time. In 2011 they were 28 million dollars, 2012 47 million dollars and by 2014 they were 91 million dollars. But expenses have also been growing, because running the many drug study tests is expensive, and so OPK has never made a profit.
But then Dr. Fisher turned things around. Something for which he is famous. He knew that one of the drugs we were working on, a long acting human growth hormone (hGH), was a drug that Pfizer would be interested in. Pfizer had been waiting for the drug to enter a phase III test level, because that would mean that it had passed most of the FDA requirements and would most likely get approved.
hGH is given to children 2 years and older that have not reached the minimum normal height range. And increasingly, doctors are also prescribing it for adults. It increases muscle mass in the elderly. It also increases muscle mass in cancer and AIDS patients that have developed cachexia, a condition where the body breaks down muscle mass. In addition to that, hGH increases heart function, stamina, sexual ability in men and reverses vaginal dryness and fragile/thin vaginal skin in older women. It also enhances the immune system. Because of these reasons, and many more, it is being increasingly prescribed for adults. And as the population ages, hGH sales will be in a strong uptrend.
The problem is that all human growth hormone drugs in current use have to be injected daily. That makes many people decide against using it, plus daily injections are expensive. OPK has developed a long acting hGH that only has to be injected once a week. It is in phase III in adults and phase II in children. The present yearly market for hGH drugs is 3 billion dollars a year. Since our drug only needs to be given once a week, instead of daily, it will be the drug of choice. Plus more people will decide to take it since it only needs to be taken once a week, and more people will choose to take it because it will also be less expensive since it is not used every day.
But even though this was a drug that would be an excellent cash cow if the drug trials could be advanced all the way through FDA approval, we didn't have enough money to finish running the tests on hGH, plus all our other drugs. Dr. Fisher talked to Pfizer, and they came to the rescue. They gave us $295 million up front, which brought us to a cash balance of $348 million, plus they agreed to pay another $275 million dollars to fund both our child and adult studies through to FDA approval. And once Pfizer starts selling the drugs we will get royalty payments.
According to a paper on drug royalties, written by Goldscheider, since the company that develops the drug shoulders most of the expenses, they get a large royalty. And if it is a drug that will not face competition, and thus will be able to be sold for good profits, such as our drug, they will get even larger royalties. The company that acquires the rights to the drug and then starts selling the drug, after expenses, will usually have a profit of 50%. Per Goldscheider, royalties will be 25% of the profit for drugs not facing completion. That would work out to a 12.5% royalty and on revenues of $3 billion yearly, that would mean that OPK would get $375 million a year.
Dr. Fisher previously did a sleight of hand on another drug of ours. In 2009, Schering-Plough, a large pharmacological company, was working on the drug rolapitant for nausea and vomiting caused by chemotherapy. They hoped that it would be better than present drugs and longer acting, but their phase II trial didn't show that it was effective for either of those cases, so they shelved development of the drug. Dr. Fisher bought the rights to the drug for $2 million, and then sold it to Tesaro for $121 million plus royalties, a huge profit over the $2 million we paid. Also, Tesaro believes that they can get the drug to work, and if so, in the future we will be getting royalty payments, which Tesaro says will be double digit, meaning 10% or higher.
The Pfizer human growth hormone deal gave us a large cash balance, enough to allow us to develop our other drugs, even with our high cash burn. That was why our stock was climbing. And the new maneuver by Dr. Frost, acquiring BRLI for shares instead of cash, puts us in an even better position. (I will give a site later on that discusses the probability of the deal going through.)
BRLI has a large library of genetic data plus it has proprietary sequencing technologies that will greatly enhance Opko Health's development of drugs. BRLI also has a large sales force, here in America, and also Europe, with connections to insurance companies and doctors, and this will facilitate the ramp up the sales of OPK's prostate 4Kscore blood test, plus their large sales force can be used to sell our other drugs as they are approved.
Combining the two companies will also drastically increase OPK's money flow. BRLI's annual revenue was 832 million dollars last year, almost ten times OPK's revenue of 91 million dollars, plus BRLI had a profit of 47 million dollars, which is growing yearly, and will certainly help us out. Just with this acquisition, we have become a much stronger overall company.
This will give us the time to become a cash cow on our own. Our 4Kscore test will soon be generating significant profits. Our prostate 4Kscore test has already been approved and OPK is contacting urologists and explaining that its use will greatly decrease the number of prostate biopsies that have to be performed. The test is being accepted by more and more urologists here in America, Europe and now Mexico. In fact, in just the last quarter, the number of urologists that said that they were going to use the test, increased by 50%.
Every procedure done by a doctor has a CPT (Current Procedural Terminology) code number assigned to the procedure, and it is that number that is sent to the insurance company and Medicare for payment. Without that code, the patient has to pay for the test themselves, and so actual use of the test has been low. We have finally been issued our CPT code, and now use of our 4Kscore test should dramatically increase. According to what I have found in researching the 4Kscore test, the yearly income should eventually be 2 billion dollars, and then climbing, because the number of men being diagnosed with prostate cancer is growing yearly.
We have a number of drugs we are developing which will also be significant cash generators.
We are in the final stages of getting approval for Rayaldee, the first and only modified slow release formula of calcifediol, a major transport form of vitamin D, for end stage renal disease patients. In patients with end stage renal disease, when they take vitamin D, the body produces an abnormal enzyme CYP24, which destroys it. Even taking very high doses of vitamin D will not overcome this destructive process. This causes patients with kidney disease to have extremely low levels of vitamin D which causes the bones to lose calcium into the blood stream. The calcium is then deposited into the soft tissues, such as the veins, and causes severe cardiovascular disease and other problems. Rayaldee is a first in class slow released vitamin D drug and the Phase I and II tests have shown that it does not cause the release of CYP24, and in addition to that, it raised the vitamin D levels to normal levels.
Dr. John Cannell, an acknowledged expert on calcifediol, was so impressed with our Rayaldee drug that on 6 January 2014 he wrote that he had invested his life savings in OPK. OPK stock at that time was in the $8 to $9 range, so even at $15 a share he is in good shape.
Opko Health, in its press release, said that sales of Rayaldee should reach $6 billion a year. This may sound like a lot, but analyst reports that I have read, put the amount at $12 billion to $24 billion dollars a year if it is used world wide and $6 billion just for the U.S. market. And since the company plans on selling it in Europe, Mexico + Central America, and Asia, I would think that sales of $6 billion a year is conservative. In fact, OPK, in its legal Form 8K filing, lists it as worth $12 billion a year.
OPKO owns global rights to a heparin-derived oligosaccharide intended for therapeutic use in asthma and COPD (chronic obstructive pulmonary disease) as well as cystic fibrosis and other respiratory diseases. It is more efficient than current asthma medications and doesn't have their side effects.
Initial studies, using animals, have demonstrated successful anti-inflammatory and anti-allergic activity when administered orally or inhaled with inhalers or nebulizers. Human feasibility studies for asthma have also proven successful.
OPK also has an advanced inhaler which is superior to present inhalers and easier to use. Inspiromatic™ offers improved drug deposition to the lower airways of patients and real time data for patient compliance monitoring. The device has an internal microcontroller and flow sensor that controls the delivery of the medication and, using micro-pump technology, dispenses the drug particles at the right speed without the need for forceful inhalation. It also provides instant feedback to the patient with a green or red flasher light to indicate proper inhalation and a beeper after the dose has been delivered. For physicians, Inspiromatic™ provides a built-in logger that stores patient use data for easy access and transmission by electronic devices such as smart phones.
In a recently completed, First In Man double blind clinical study, conducted with 30 asthmatic children, comparing Inspiromatic™ to a market leading inhaler, it demonstrated superior pulmonary delivery of the active drug.
The present drug of choice is Advair, which also uses an inhaler. Its annual sales are +$2 billion a year. OPK's drug is more effective and has less side effects, plus its inhaler is much more effective, so it will probably win over much of the market and should end up with sales in the range of $2 billion.
OPK’s Factor VIIa hemophilia drug is unlike any of the hemophilia drugs now in use. It has received an orphan drug designation, so that means it will be fast tracked to approval. All the hemophilia drugs in use today have to be given by IV and are short acting, only staying active in the body for about a day. Bayer, and two other companies, are developing a longer acting drug that only has to be given once a week, but those drugs also have to be given by Intravenous Injection. This is especially difficult for infants and children because they have such tiny veins, but it is also awkward and painful for adults. Either a needle has to be inserted into their vein, which is painful and causes scaring of the vein, which over time makes the vein unusable, or a port has to be inserted, and long term IV ports have a risk factor of becoming infected.
OPK has developed a long acting drug, which also only has to be given once a week, but it is given subcutaneously. Subcutaneously means under the skin. The medicine is drawn up into a syringe and then injected under the skin using a tiny needle. You don't use a long or big needle because the medication is given into the layer of fat under the skin in the abdomen. The fatty tissue is filled with tiny capillaries which slowly absorb the medication. A larger needle, like the ones given for shots in the buns, ouch, are not used, you don't want the needle to go through the layer of fat and into the muscle, because the muscle is filled with blood vessels, plus there is a lot of movement of the muscle, and so the medicine would be absorbed much faster and so last a shorter time. For the same reason, the medicine isn't injected into the fat layer of the arm or leg, because the movements of the arm and leg would increase its absorption and its coagulation activity would stop working in less than a week..
People can do the procedure by them selves at home. Or parents can do it for their children. The drug can be used for emergency episodes, such as a cut, but its main use would be self-administration at home for prophylactic use to prevent bleeding episodes. Hemophiliacs can spontaneously start bleeding for no apparent reason, typically into the joints and muscles, and that can cause permanent damage over time. Therefore it would be best to be given on a regular (weekly) basis for life. That is why it would bring in so much money for our company, because it will be given for life and not just for occasional emergency uses. Since our medication is given subcutaneously, instead of by IV, it would be the drug of choice. OPK states it would be worth $3.5 billion a year.
OPK, working with The Scripps Research Institute, is developing the only Parkinson drug that can actually stop the progression of the disease, instead of just delay it. SR 3306, a novel compound discovered by scientists at The Scripps Research Institute, stops the death of the brains cells whose destruction leads to Parkinson's disease. In the mid brain area is a group of dark colored cells, called substantia nigra, which produce a compound called dopamine. The dopamine is transported along the axons of the nigra cells to the stratium cells that control the movement of the muscles.
In Parkinson's disease, the substantia nigra cells die off and as the stratuin muscle controlling cells receive less dopamine, a person loses control of his muscles. Dopamine will not cross the blood brain barrier, bit it turns out that levodopa, a compound produced by certain plants, will travel through the blood stream, cross the blood brain barrier, and enter the brain. Once levodopa has entered the central nervous system, it is converted into dopamine by the enzyme aromatic L-amino acid decarboxylase. Levodopa's effect on Parkinson's disease isn't a new discovery, over 7,000 years ago, in 5,000 BC, there are recordings of people with symptoms identical to Parkinson's and they were treated with the plants that contain levodopa. The extra dopamine that is produced by the levodopa, along with the output of dopamine from the remaining nigra cells, gives a person back normal control of their muscles. The problem is, that the nigra cells continue to die off, and increasing the levodopa to compensate for their loss can't be done because large amounts of levodopa are toxic. Because the nigra cells continue to die off, eventually their production of dopamine isn't enough to maintain muscle control and the person starts a downward spiral to death.
OPK's SR 3306 compound inhibits a class of enzymes called jun-N-terminal kinases (JNK) that are involved in the death of substantia nigra cells in persons with Parkinson's disease. JNK is involved in apoptosis (self induced cell death) and survival signaling of cells and was identified in the death of neuronal cells. Since people with Parkinson's already have decreased nigra cells, and so don't produce enough dopamine, they will still need to continue taking their levodopa, but they will also be given SR 3306, which will stop the destruction of their remaining nigra cells, and so it will stop the actual progression of the persons Parkinson's disease. This is a life changing event. Something that no other drug can do, and in situations where there is no known drug to stop a disease, the FDA has a special fast tract procedure that they use. Our drug fits in this category.
There are over a million people with Parkinson's disease in America and another 9 million worldwide. The market for our Parkinson's drug would be over a billion dollars a year.
Here is a drug that could be interesting. OPK is working on a new vaccine design that could be applied to vaccines for regular influenza, plus the many strains of influenza such as ‘swine flu’, ‘bird flu’, and perhaps other viral diseases such as Hepatitis C and HIV.
Hemagglutinin is the key molecule that determines the entry of a virus into a host cell. Experiments were done to see how the hemagglutinin protein found on the surface of influenza viruses binds to the host cell, including how glycans (sugar chains) attached to the surface of hemagglutinin affect the binding. The surprising discovery was made that hemagglutinin stripped of most of its glycans bound more strongly to host molecules than fully glycosylated hemagglutinin. Vaccines were constructed and tested on mice. The investigators found that the ‘nearly naked’ mono-glycosylated hemagglutinins were able to neutralize a broader spectrum of virus types than the regular fully glycosylated hemagglutinins. They also found that mice given a vaccine made from hemagglutinins with less glycan attached to the surface and then given a lethal dose of influenza virus, increased survival rate by up to 50% in comparison with unvaccinated animals.
Up until now, only regular fully glycosylated hemagglutinins have been used in the production of vaccines. The mono-glycosylated hemagglutinin as a vaccine in this study showed a stronger immune response with broader neutralizing activities against H5N1 and H1N1 influenza. Dr. Che Ma, one of the investigators in the mouse study, said, "It might be a better strategy to design vaccines with hemaglutinins stripped of glycans.” The team leader, Dr. Chi-Huey Wong said,”Glycan modeling and the concept of consensus protein sequence in the design are the two keys which pave the way to the development of a universal vaccine against influenza and other human viruses.“ A universal virus vaccine would be a game changer.
Opko Health has been trying to develop a vaccine using this technique for five years, but so far has not come up with a vaccine that meets the criteria for a phase I test. If we ever come up with a vaccine that works, that could be a real money maker.
And finally, all the reports that I have read say that our calcifediol end stage kidney disease medication will be our biggest winner at $12 billion a year, while they only mention in passing the drug that I think could be our biggest money maker, literally worth tens of billions of dollars a year. In Opko Healths Form 8K filing it stated that the drug would bring in over 15 billion dollars a year. That drug is our weight reducing candidate, and what is interesting, is that it also directly lowers blood sugar levels and cholesterol levels.
Because obesity isn’t a disease, regulators have a low tolerance for worrisome side effects. On the other hand people that are morbidly over weight (and are designated as obese, not just overweight) develop many medical problems, such as diabetes, and die young. Weight loss counseling and the weight loss medications available today do not work on these people. 400,000 people in America die from obesity related problems every year. So far the only treatment available is a gastric bypass surgery called Roux-en-Y, which itself can cause life threatening complications. So if a medication was developed that induced weight loss in this group of people, and thus obviate the need for surgery, the FDA would consider expediting its approval, especially considering the death toll from obesity related problems.
Drug companies have spent decades and over a billion dollars trying to come up with a weight loss drug. Older weight loss medicines made by companies like Sanofi and GlaxoSmithKline Plc stumbled because they were deemed too dangerous or came with unpleasant side effects. In the last few years four new drugs have been approved by the FDA, but so far their sales have been weak.
OPK, along with Prolor Biotech, are working on oxyntomodulin, a peptide hormone produced by cells in the small intestine where It is released into the bloodstream when a person ingests food and travels to the brain, where it acts to enhance satiety and reduce appetite. Since it is a natural compound produced by the body, previous tests showed that it did not have any side effects. Previous companies have tested it, and it did induce weight loss, but it is short acting and had to be injected subcutaneously multiple times a day, usually just before meals. Which was awkward. How would you like to inject yourself just before you eat at a restaurant? Or even before meals at home or at work.
Other companies tried to make a long acting form of oxyntomodulin, but all the forms that they came up with had only weak weight loss effects. When they changed the structure of the oxyntomodulin molecule, it lost its effectiveness. However, Dr. Frost is famous for either taking previous medications that were ineffective and redesigning them to greatly enhance their properties, or finding and buying companies that had come up with a redesigned medication. He has done it again with oxyntomodulin.
Prolor Biotech, using Reversible PEGylaton technology, which leaves a compound intact, but adds a molecular tail to it to change its characteristics, has developed a long acting oxyntomodulin (dual GLP-1/Glucagon agonist) called MOD-6030. It is a slow release form of the intact oxyntomodulin, enabling a prolonged exposure of the peptide while maintaining its biological activity and the ability of the peptide to pass the blood brain barrier. Tests showed that it only has to be given once a week. Unexpectedly, not only did the drug not lose any of its effectiveness, it had a much stronger weight loss effect than the natural hormone oxytomodulin itself, and it even improved glycemic control, lowering blood sugar levels, thus meaning it could also be used as a diabetic drug, plus it had a large cholesterol lowering effect. It should be noted that diabetics also have problems with elevated cholesterol. It turns out, that since it stays active in the body for days at a time instead of just a few hours, its effects are strongly enhanced and factors that weren't previously apparent, such as its diabetic and cholesterol properties, show up.
In a 30 day animal study, animals in the placebo group showed minimal changes in the study parameters, while the animals receiving MOD-6030 achieved on average a 28% reduction in weight, a 29% reduction in food intake, a 19% reduction in blood glucose levels and a 57% reduction in cholesterol levels. The lead investigator stated, “We believe there is great demand among obese patients and their physicians for therapies that will help patients lose weight and reduce elevated glucose levels." I would add that diabetic doctors would also be interested in the drug, either as a stand alone drug, or for it to be given along with a patients diabetic drugs. And since diabetic drugs have side effects, some of them serious, adding our drug to their protocol may enable them to lower the dosage of their diabetic drug, thereby decreasing their risk of side effects.
As of January 2015, over 2 billion adults, 18 years or older worldwide, were overweight, and of those, over 600 million were obese. In America over 70 million adults are obese. Because of this, OPK states that its weight loss medication could bring in $15 billion a year. Other analysts put the number even higher. What none of them mentioned was that there are over 400 million diabetics world wide, with 70 million being in America. I would think that a number of those could end up taking our drug, so we could end up making well over 15 billion dollars a year if our weight loss drug works. Even if we only end up with a lower percentage of that, it would still be a very lucrative drug.
Some people might worry that since we have half a billion shares of stock, that it will be difficult for our stock price to rise, so I compared our company with another pharmacology company with over half a billion shares, way over half a billion shares.
Johnson and Johnson, JNJ, a large health care company, has 2.8 billion shares, which is 5.2 times the number of shares that we will have with our combined companies. JNJ made a profit of 52.2 billion dollars last year, and since it has 5.2 times as many shares as we have, that would be the equivalent of us making a profit of 10 billion dollars. ($52.2/5.2 = 10.04%) We aren't to the point of making 10 billion dollars in profit at this time, in fact we are losing money, but if you add up all of the potential revenue we will be getting if all our drugs are approved, eventually we will be getting much more than $10 billion in profits. All our drugs added up, just using the conservative estimates, comes to $30 billion, and since the profit on drugs that are not facing competition is 50%, that comes to $15 billion in profits. JNJ's stock price has been steady around $100/share. So on an equivalent basis, we could reach $100/share, or higher, if we earn profits of over $10 billion a year when all our drugs are approved. Especially since we will probably have more drugs in the pipeline as time goes by.
Another thing to consider. JNJ has a dividend of $3 per share. In the future, when OPK is established and has a steady cash flow, there is a good chance that it will also start paying dividends, and when it does, in a few years of dividend payments, you would make back more money in dividends than you had paid for the stock.
People have pointed out that BRLI stockholders have to approve the transaction of OPK acquiring BRLI. BRLI has been stuck in the $30 range since 2012. OPK has been climbing during that time. The two companies combined would be an especially strong entity, so it would also tend to climb in price, probably even more strongly than OPK by itself has been climbing. From what I have been able to find out, 80% of BRLI stock is held by institutions. They know that Dr. Frost is in charge of OPK, and they are aware that he is brilliant in turning companies into money making machines. I think that they will be thrilled that BRLI is going to become part of OPK.
Here is a write up by an analyst that covers BRLI. He concludes that maybe the transaction will be approved or maybe it won't, but leans towards maybe it will.
For matters of disclosure, since people might accuse me of pumping OPK stock, I will say that I have accumulated 3,000 shares of OPK at an average price of $15.67, which cost me $47,000. Like Dr. John Cannell, this is most of my life's savings. I bought the stock because I think that it is a great buy. And obviously, so does Dr. Frost and many of our other insiders because they have been steady in buying our stock. Of course, they could be wrong, but they know a lot more of what is going on with our stock than I do. They know its financial shape and how the drug tests are going, and they are very enthusiastic in their buying. They must have talked to the BRLI management prior to arranging for OPK to acquire it, and they may have even talked to some of the institutions that own BRLI stock. And they are still buying OPK stock. That speaks volumes!
Some of the write ups that I have read, say that since we have such a large cash burn rate, if the merger isn't approved, and we don't end up with BRLI's cash flow and profits, our stock will crash and maybe even go bankrupt. Not one of them have mentioned that even without BRLI, we have a cash balance of 348 million dollars, enough to fund all our studies, even with our cash burn. So we don't have to worry about bankruptcy. Also, Pfizer will be paying us another 275 million dollars, and that will give us a cash balance of 623 million dollars (minus the money spent to fund our studies and other corporate expenses). So we have over half a billion dollars to fund our company, and even if the merger of the two companies isn't approved, we will still do great. Great if the merger goes through, great if it doesn't. That is what you call a win-win situation.
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